InFocus: Common ownership: genuine risk or partisan wedge issue?

As the House of Representatives Economics Committee inquiry investigates the impact of common ownership in Australian markets, there is division across political lines over whether the root cause are index funds or the superannuation industry.

The committee is currently investigating common ownership, described as when a fund or collaborative fund owned shares in competing firms, and whether it presented a threat to competition. 

It aimed to examine ownership of the Australian Securities Exchange (ASX) and the so-called ‘mega funds’ which were taking a greater share of the market. 

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Led by committee chair, Tim Wilson, Coalition MPs had taken issue with the power of super funds, particularly industry super funds. Data released this month for the end of June 2021 showed $3.35 trillion of the $4.32 trillion held in managed funds was invested in the super industry. 

Dr Martin Fahy, Association of Superannuation Funds of Australia (ASFA) chief executive, said all evidence presented to the committee showed there was no correlation between common ownership and consumer harm.

Meanwhile Labor, led by the committee’s deputy chair Dr Andrew Leigh, placed concern on the major exchange traded fund (ETF) providers – with BlackRock and Vanguard coming under scrutiny for their large holdings in the big four banks.

In testimony to Parliament from Westpac and NAB, it was revealed that Vanguard and BlackRock were the largest investors in each bank – both held around 5% to 6% of each bank. 

The Australian Competition and Consumer Commission (ACCC) said it had not found any research to back up the idea that concentration of capital would have an impact on the market – whether from super funds or index-tracking funds – although it noted it could be an issue in concentrated sectors such as airlines or retail banking.

However, this failed to prevent super funds, which were starting to lean towards in-house management, from separately banding together to gain majority control to drive direction of these entities.

But this was not a concern for Westpac CEO, Peter King, who said industry funds did not necessarily have aligned views.

Index investing

In a statement to Money Management, a spokesperson for BlackRock said: “Index funds have democratised access to diversified investment for millions of savers planning for long-term goals like retirement. 

“Asset managers serve as stewards of these savers’ assets by monitoring governance standards, engaging with company managers and directors, and casting informed votes on management and shareholder proposals to advocate for long-term shareholder interests.

“Asset managers remain predominantly minority shareholders in public companies. While we provide important representation for shareholders, each is but one voice among many.

“It is ultimately the responsibility of the board and management to consider the interests of all stakeholders – including long-term shareholders.”

Alex Vynokur, BetaShares chief executive, said the duty for index-investing firms was not just to deliver returns but to promote responsible investment practices.

“I would absolutely agree with the observation that [index-tracking funds] don’t have uniformity in the industry as to what people do and how they do it,” Vynokur said.

“Industry super funds are in a slightly different boat and some of the comments from members of Parliament have sought to treat super funds as a single entity which are voting in unison.

“I would make the observation again the boards of trustees of various superannuation funds have fiduciary duties to their own members and I would not for a second assume those duties are being ignored in the pursuit of some ulterior motive.”

Vynokur said in a hypothetical situation where index funds controlled 80% of the market would create a “phenomenal opportunity” for active managers to add alpha.

“There is a self-correcting element in free markets and frankly the rise of ETFs and index investing is self-correcting on the other side,” Vynokur said.

“We’re currently in the situation where 90% plus of assets are actively-managed, yet 75% of active managers are underperforming the benchmark.

“Clearly the growth in the ETF industry is reflective of the fact investors are saying ‘we’re getting bad value for money’.” 

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